Operation Choke Point, the federal governments initiative to use the payments industry to thwart merchant fraud, is succeeding on at least one level. Its making ISOs and agents gasp for air as they cope with lawsuits, subpoenas and uncertainty.
The actual impact on the people in the ecosystem has been painful, says Greg Cohen, chief revenue and strategy officer for Merchant Warehouse, a Boston-based super-ISO.
In at least two cases, the Department of Justice has filed suit against ISOs for helping to process transactions for merchants accused of fraud. To settle one of the suits, an ISO paid the DOJ $400,000 and forfeited some future revenue.
Other members of the acquiring industry have incurred legal expenses when they were subpoenaed to appear before investigators, observers say.
Some in the industry have lost revenue because theyve hesitated to sign up merchants that federal regulators may consider inappropriate.
Their caution arose partly because the Federal Deposit Insurance Corp. has published a list of 30 merchant categories associated with high risk.
The categories are amunition sales, cable box de-scramblers, coin dealers, credit card schemes, credit repair services, dating services, debt consolidation scams, drug paraphernalia, escort Services, firearms sales, fireworks sales, get rich products, government grants, home-based charities, lifetime guarantees, lifetime memberships, lottery sales, mailing lists/personal info, money transfer networks, online gambling, payday loans, pharmaceutical sales, ponzi schemes, pornography, pyramid-type sales, racist materials, surveillance equipment, telemarketing, tobacco sales and travel clubs.
That list has caused confusion because it covers so many merchants who are innocent of any crime, Cohen says.
There are no specific laws prohibiting these kinds of merchants, so where are the boundaries? he asks. Today, its Merchants A, B and C; tomorrow its Merchants X, Y and Z.
The ambiguity creates risk as ISOs and agents put together business plans and marketing campaigns and while selling and servicing clients, Cohen notes.
We just dont know whats black and white anymore, he says. Theres this huge area of gray, which seems to be a moving target.
To end the uncertainty, the Electronic Transactions Association is asking its members to sign a petition it plans to present to both houses of Congress. In the document the ETA is asking legislators to make the industry a partner in combatting fraud instead of a target for regulatory enforcement.
Comments that signers added to the petition reflect the industrys concerns.
Operation Choke Point is choking off legitimate business, one signer wrote.
We hold 100% liability and would never knowingly assist someone in committing fraud, but Choke Point seems to be going after the innocent ISOs, wrote another petitioner. We can never make enough money on a single account to offset the potential loses of an account. It makes no sense that we would assist in fraudulent activity.
It has created an entire atmosphere of fear and caution or straight up paranoia that I have never seen, wrote another. This is not the way to run a country.